Abstract
ABSTRACT Purpose: This research aims to analyse price movements in the oil market stimulated by extreme events such as oil platform explosions, geopolitical events, and financial crises and to understand the reaction and the persistence of these effects on the commodity’s price. Originality/value: The prominent position of oil raises the concerns of investors, producers, and policymakers because of the unstable behaviour of its price level and pattern of volatility. This justifies the need to investigate the dynamics of this behaviour for the purposes of economic policy formation, strategies around trade and costs, and revenue calculations for companies of this sector, as well as investment decisions for other sources of energy. Design/methodology/approach: In order to model the occurrence of volatility jumps caused by extreme events, four specifications were used for the ARJI-GARCH conditional jumping methodology developed by Chan and Maheu (2002). The data consist of 2008 daily records of the closing price of light oil (WTI) from January 2010 to December 2017 obtained from NYMEX. Findings: Among several results it was verified that the occurrence of extreme events causes significant changes in the oil price, which goes against the efficient market hypothesis, and that a time-varying conditional jump process can be specified, but it has little sensibility to past shocks and very short-term persistence.
Highlights
Oil is the world’s most important source of energy, and this prominent position raises concerns for investors, producers, and policymakers due to its unstable price behaviour and volatility pattern
In order to model the occurrence of volatility jumps caused by extreme events, four specifications were used for the auto-regressive jump-intensity (ARJI)-generalized autoregressive conditional heteroscedastic models (GARCH) conditional jumping methodology developed by Chan and Maheu (2002)
According to the literature, jumping models have proven to be a useful tool for dealing with extreme events and sudden price chances, and in addition they have been successfully applied to various types of financial market variables
Summary
Oil is the world’s most important source of energy, and this prominent position raises concerns for investors, producers, and policymakers due to its unstable price behaviour and volatility pattern. Those issues justify the need to investigate its effects on economic policymaking, trading strategies, and impact on profitability performance for companies that rely on oil as an input and investment decisions in other energy sources. Crude oil prices and price volatility have been on a run-up spree since the late 1990s, changing their behaviour according to the world’s political and economic turmoil. Governments and investors alike are interested in how to predict oil price volatility trends to support the best policy and investment decisions
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